Originally published in FinancIal Review

There were plenty of reasons why Coles investors were upbeat last week. The supermarket giant was making inroads against Woolworths. Profits were up. What went under the radar was the work being done to transform its technology.

It hasn’t been unusual for non-tech stocks to highlight their digital chops throughout the half-yearly reporting season last month, but with investors currently richly rewarding parsimony, nothing says efficient deployment of capital as succinctly as two letters: AI.

The idea of bots that can tirelessly do the work of costly staff, quicker and more effectively – while also harvesting commercially valuable data insights as they go – is highly appealing.

The problem for most companies is that, so far, their investments in artificial intelligence and digital transformation are only theoretically beneficial and difficult to prove in the numbers.

Telstra has had a good stab at it, with the telco’s chief executive Vicki Brady telling investors that the company was trying to become an “AI-fuelled organisation”.

But it is Coles that has seemingly nailed it.

Its earnings were announced on Tuesday amid cost-of-living inspired accusations of price-gouging, with submissions rolling in to a Greens-led Senate inquiry into high grocery bills. Its brand has been publicly cast as the lesser of two evils, only thanks to Brad Banducci’s limelight-hogging antics at Woolworths. But investors care more about business metrics than societal ills.

Coles chief executive Leah Weckert managed to bat away the profiteering claims, while also giving investors enough of a sniff of profitable growth to send the stock up 6 per cent on results day.

It closed Tuesday at $16.95, and has since risen further to $17.08, well ahead of its pre-results price. Its prominent deployment of technology was a big part of its story.

Light-fingered customers

At its full-year results in August, investors had taken fright at a significant rise in the cost of theft to the company. But Coles’ controversial deployment of some of the latest anti-theft technologies has clearly had an immediate impact.

When supermarkets started introducing self-service checkouts, a rise in shoplifting was more than offset by the reduction in staffing costs. But a surge in theft attributed to cost-of-living pressures saw Coles’ “loss” balloon by 20 per cent in the last financial year.

Loss is the term used by Coles to describe the financial impact of shoplifting and throwing away spoiled fresh food.

Last Tuesday, it revealed that the basis point measure for theft, which had been at 70-80 at full-year results, has been pulled back markedly to 50. Its digital revenue also performed well, with e-commerce revenue up 29 per cent on the previous corresponding period and 15 per cent for its liquor sales.

 

“Having now turned into a tailwind through the second half of 2024, we expect this [theft] largely to normalise through 2024-25, providing greater than $150 million of EBIT tailwind,” Jarden analyst Ben Gilbert wrote in a note following the earnings.

The most obvious of the new anti-theft solutions was the installation of security gates at the exits of some stores, to prevent shoppers walking out without paying for their items.

It also included AI-enabled surveillance cameras that track customers around stores, skip scan monitoring to detect when items haven’t been scanned at the self-service checkout and fog machines that fill stores with a smoke if they are broken into.

Tangible growth driver

Skip scan has been rolled out in 305 stores, and smart gates are in 267 Coles supermarkets, with them being progressively deployed into more of the worst affected stores.

A rush of news reports highlighting customers’ horror about being locked in the store and being treated like suspected criminals greeted the deployment of the technology, but analysts say the financial results are worth more than a bit of initial angst.

“Reducing theft is a tangible and sizeable potential profit growth driver,” Ord Minnett analysts wrote to clients after an earnings call last week. “Returning theft levels to the first-half fiscal 2023 level would boost group EBIT by about 9 per cent.”

Coles’ earnings were well received for reasons outside its digital efforts, of course. Its supermarkets trade was up 4.9 per cent in the first eight weeks of the year, which compared favourably with 1.5 per cent growth for the year recorded by Woolworths.

Some of this was attributable to price reductions on items like lamb, and a Pokemon collectibles program that had children badgering parents to throw extra items into the trolley.

A price war with Woolworths is arguably always on, but any escalation will mean efforts around the margins of the companies will become even more competitively important.

Digital prowess

Analysts and investors are starting to see the results of investment in digital initiatives in the warehouses and back offices, with increased adoption of AI a trend all investors are looking for.

A Coles spokeswoman said AI had been integrated into several areas of the business, to help improve operations and create more personalised shopping experiences.

“To help reduce waste and maximise shelf life, we have integrated AI into our stock replenishment system as it forecasts customer demand for products to ensure we are only ordering what we need, when we need it,” she said.

“In selected stores we are also trialling the use of AI to speed up shopping by automatically detecting the type of fruit or vegetable at the point of sale and on the digital scales in the fresh produce area. We have also installed queue monitoring technology to reduce wait time for customers in selected stores.”

Gabby Fredkin, the head of analytics and insights at Adapt, a research firm specialising in technology, said Coles and Woolworths were among a small number of Australian companies in a strong position to take advantage of AI.

A study of 200 chief information officers found only 9 per cent believed their companies could fully leverage value from AI, let alone measure the return on investment.

The recent appointment of Amanda Bardwell – who ran Woolworths’ WooliesX digital innovation division – to replace Banducci as the supermarket’s chief executive highlights the importance being placed on tech prowess in the grocery wars.

“Modern anti-theft technology is built around advanced artificial intelligence, with neural network-based technologies like computer vision the big one in helping large retailers to stop theft and fraud,” Fredkin said.

“But to leverage that you need the foundational technology set up. There’s no AI without IA, which is information architecture.

“If you go to a university masters-level class in Australia on real-world analytics, they often use Woolies and Coles as top examples, like how Woolworths uses basket analysis, and Coles uses Flybuys.

“Tech plays a key role everywhere from the supply chain to effective management and understanding customers, and now obviously they count the value of reducing fraud and theft as well.”